May 22 2019

Tariffs and Hardware Startups

If the majority of your understanding of how tariffs work is from Twitter, CNN, or Fox News, I encourage you to go read Trump’s China Tariffs Hit America’s Poor and Working Class the Hardest. And, if you think China is paying the U.S. directly for the tariffs, well, no …

We have a lot of hardware companies in our portfolio so I’ve been living in the world of “what to do about tariffs” for several quarters. My fantasy at the beginning was “ignore and hope they go away.” This quickly evolved through “are there any ways around this” to land at “deal with the reality of increased cost, research, and compliance.”

Fun.

It also became apparent, almost right away, that startups had a huge disadvantage over larger companies that had significant U.S. lobbying activities. We explored a few paths to engaging with the U.S. government around this and basically were told some version of “go away – you are too small and unimportant.”

Awesome.

Once I accepted the reality that the startups were going to have to pay the tariffs directly, that they had little control on what the tariffs would be, how and when they would change, and whether or not they’d get exemptions, I started operating under the assumption that 100% of the cost associated with the tariff would fall on the startup.

So, I started observing what other companies, especially large ones, were doing beyond the lobbying efforts of BigCo that resulted in exemptions. Would they absorb the tariff as an increase in COGS? Would they increase prices? Would they pass on the tariff to the customer?

A little more research showed what is pretty obvious in hindsight. Many BigCos are simply treating the tariff like a tax and passing it on, either directly or indirectly, to the consumer. This is similar to what is happening with state taxes, as states come up with lots of new taxes for out of state vendors, both physical and digital.

This shows up a few ways. While some companies are increasing the cost of their product to include the tariff (or even a markup on the tariff), many companies are trying to hold their price the same while passing the tariff on through other approaches.

Some companies are adding a line to their invoice called “Tariffs” and charging that to customers (I’m seeing this mostly in B2B situations). This looks like:

Product Price: $X
Shipping: $Y
Tariffs: $Z
Taxes: $T
——————–
Total: X + Y+ Z + T

Others are including Tariffs in the Shipping line.

Product Price: $X
Shipping and Tariffs: $Y + $Z
Taxes: $T
——————–
Total: X + Y + Z + T

But the one I’m seeing the most is simply including Tariffs in the “Taxes” line, where Tariffs are considered a tax.

Product Price: $X
Shipping: $Y
Taxes: $T + $Z
——————–
Total: X + Y+ Z + T

While some BigCos appear to be eating the cost of the tariff, this seems to be the exception. Startups should pay attention, and act accordingly.

If you are a hardware startup and have either seen, or figured out, a different approach, I’d love to hear about it.